295.F公允價(jià)值計(jì)量屬性的探析外文原文

1、Fair-value accounting: A cautionary tale from EnronGeorge J. Benston *Goizueta Business School, Emory University, Atlanta, GA 30322,United StatesAbstract：The FASB s 2004 Exposure Draft,Fair-Value Measurements, would have companies determine fair values by reference to market prices on the same asset

2、s (level 1), similar assets (level 2) and, where these prices are not available or appropriate, present value and other internally generatedestimated values (level 3). Enron extensively used level three estimates and, in some instances, level 2 estimates, for its external and internal reporting. A d

3、escription of it usse and misuse of fair-value accounting should provide some insights into the problems that auditors and financial statement users might face when companies use level 2 and, more importantly, level 3 fair valuations. Enron first used level 3 fair-value accounting for energy contrac

4、ts, then for trading activities generally and undertakings designated as merchant investments. Simultaneeosueslfya,irthvalues were used to evaluate and compensate senior employees. Enrons acco(wunitthanAtnsdersen s approval) usedaccounting devices to report cash flow from operations rather than fina

5、ncing and to otherwise cover up fair-value overstatementsand losses on projects undertaken by managers whose compensation was based on fair values. Based on a chronologically ordered analysis of its activities and investments, I believe that Enron suse of fair-value accounting is substantially respo

6、nsible for its demise.1. IntroductionThe US and International Financial Accounting StandardsBoards (FASB and IASB) have been moving towards replacing historical-cost with fair-value accounting. In general, fair values have been limited to financial assets and liabilities, at least in the financial s

7、tatements proper.1 A Proposed Statement of Financial Accounting Standards, Fair-Value Measurements (FASB, 2005, p.5), specifies a -fvaairlue hierarchy. Level 1 bases fair values on quotperdices for identical assets and liabilities in active reference markets wheneverthat information is available. If

8、 suchprices are not available, level 2 would prevail, for which quoted prices on similarassets and liabilities in active markets, adjusted as appropriate for differenecs would be used (FASB, 2005, p.6). Level 3 estimates require judgment in the selection andapplication of valuation techniques and re

9、levant inputs. The exposure draft discussesmeasurementproblems that complicate application of all three levels. For example, with respect to levels 1 and 2, how should prices that vary by quantity purchased or sold be applied and, where transactions costs are significant, should entry or exit prices

10、 be used? As difficult as are these problems, at least many independent public accountants and auditors have dealt with them extensively and are aware of measurementand verification pitfalls. However, company accountants and externalauditors have had less experience with the third level (at least fo

11、r external reporting), which use estimates based on discounted cash flows and other valuation techniques produced by company managers rather than by reference to market prices.Indeed, there are few situations that have revealed the problems encountered when companies use third level estimates for th

12、eir public financial reports. Instances in which transaction-basedhistorical-based numbers have been misleadingly and/or fraudulently reported abound, such as companies reporting revenue before it is earned (and sometimes not ever earned), inventories misreported and mispriced, and expenditures capi

13、talized rather than expensed. Mulford and Comiskey (2002) and Schilit (2002) provide many illustrations of such schenanigan(sasSchilit characterizes them). But they (and to my knowledge, few, if any, others) do not describe how fair-value numbers not grounded on actual market prices have been misuse

14、d and abused. Enron sbankruptcy and the subsequent investigations and public revelations of how their managersused level 3 fair-value estimates for both internal and external accounting and the effect of those measurementson their operations and performance should provide some useful insights into t

15、he problems that auditors are likely to face should the proposed SFAS Fair-Value Measurements be adopted.Although Enron s failure in December 2001 had many causes,2 both immediate (admissions of massive accounting misstatements) and proximate (more complicated, as described below), there is strong r

16、eason to believe that Enron searly and continuing use of level 3 fair-value accounting played an important role in its demise. It appears that Enron initially used level 3 fair-value estimates (predominantly present value estimates) without any intent to mislead investors, but rather to motivate and

17、 reward managers for the economic benefits they achieved for shareholders. Enron first revalued energy contracts, reflecting an innovation in how these contracts were structured, with the increase in value reported as current period earnings. Then level 3 revaluations were applied to other assets, p

18、articularly what Enron termed merchainvestments. Increasingly, as Enron soperations were not as profitable as its managers predicted to the stock market, these upward revaluations were used opportunistically to inflate reported net income. This tendency was exacerbatedby Enron sbasing managerscompen

19、sation on the estimated fair -values of their merchant investment projects. This gave those managers strong incentives to over-invest resources in often costly, poorly devised, and poorly implemented projects that could garner a high fairvaluation. Initially, some contracts and merchant investments

20、may have had value beyond their costs. But, contrary to the way fair-value accounting should be used, reductions in value rarely were recognized and recorded because they either were ignored or were assumed to be temporary. Market prices, specified as level 2 estimates in Fair-Value Measurements (FA

21、SB, 2005), were used by Enron to value restricted stock, although in most instances they were not adjusted to account for differences in value between Enron hsoldings and publicly traded stock, as specified by the FASB. Market prices were also used by Enron s traders in models to value their positio

22、ns. In almost all of these applications, the numbersused tended to overstate the value of Enrons assets and reported net income.As the following largely chronological description of Enron asdoption of level 3 fair- value accounting shows, its abuse by Enron smanagers occurred gradually until it domi

23、nated their decisions, reports to the public, and accounting procedures. Although, technically, fair-value accounting under GAAP was limited to financial assets, Enron saccountants were able to get around this restriction and record present-value-estimatesof other assets using procedures that were a

24、ccepted and possibly designed by its external auditor, Arthur Andersen.2. Enron s adoption and use of fa-ivr alue accountingEnrons initial substantial success and later farieluwas the result of a succession of decisions. Fair-value accounting played an important role in these decisions because it af

25、fected indicators of successand managerial incentives. These led to accounting cover-ups and, I believe, to Enron subsequent bankruptcy. I present these developments essentially in chronological order, which shows how Enron s initial reasonable -vaulsue oafcfcaoirunting evolved and eventually domina

26、ted its accounting and corrupted its operations and reporting to shareholders.2.1. Energy contractsEnron developed from the merger of several pipeline companies that made it the largest natural gas distribution system in the United States. In 1990, Jeffrey Skilling joined Enron after having been a M

27、cKinsey consultant to the company. He had developed a method of trading natural gas contracts called the Gas Bank. Enron s CEO, Kenneth Lay, persuadedhim to join the company. Skilling became chairman and CEO of a new division, Enron Finance, with the mandate to make the Gas Bank work, for which he w

28、ould be richly compensated with phantom equity (wherein he received additional pay in proportion to increases in the market price of Enron stock). Enron Finance sold long-term contracts for gas to utilities and manufacturers. Skilling innsovation was to give natural gas producers up-front cash payme

29、nts, which induced them to sign long-term supply contracts. He insisted on use of m-atork-market (actually f-aviarlue, asthere was no market for the contracts) accountingto measure his division nest profit. In 1991 Enron bsoard of directors, audit committee and its external auditor, Arthur Andersen,

30、 approved the use of this m-atork-market accounting. In January 1992 the SEC approved it forcognatsracts beginning that year. Enron, though, used mark-to-market accounting for its not-as-yet-filed 1991 statements (without objection by the SEC) and booked $242 million in earnings. Thereafter, Enron r

31、ecorded gains (earnings) when gas contracts were signed, based on its estimates of gas prices projected over many (e.g., 10 and 20) years.In 1991, Enron created a new division that merged Enron Finance withEnron Gas Marketing (which sold natural gas to wholesale customers) andHouston Pipeline to for

32、m Enron Capital and Trade Resources (ECT), all of which were managed by Skilling. He adopted fair-value accounting for ECTand he compensated the division msanagers with percentages of internally generatedestimates of the fair values of contracts they developed. An early (1992)example was a 20-year c

33、ontract to supply natural gas to the developer of a large electric generating plant under construction, Sithe Energies. ECT immediately recorded the estimated net present value of that contract as current earnings. During the 1990s, as changes in energy prices indicated that the contract was more va

34、luable, additional gains resulting from revaluations to fair value were recorded, which allowed Enron to meet its internal and external quarterly net income projections. By the late 1990s, Sithe owed Enron $1.5 billion.However, even though Enron s internal Risk Assessment and Control (RAC) group est

35、imated that Sithes only asset (worthjust over $400 million) was inadequate to pay its obligation, the fair value of the contract was not reduced and, consequently, a loss was not recorded. In fact, the loss was not recorded until after Enron declared bankruptcy.2.2. “Merchant ”investmentsEnron also

36、used fair- value accounting for its merchant in vestme ntsart nership in terests and stock in un traded or thinly traded compa nies it started or in which it invested. As was the situation for the energy contracts, the fair values were not based on actual market prices, because no market prices exis

37、ted for the merchant investments. Although the SEC and FASB require fair-value accounting for energy contracts, FAS 115 limits revaluations of securities to those traded on a recognized exchange and for which there were reliable share prices, and valuation increases in non-financial assets are not p

38、ermitted. Enron (and possibly other corporations) used the following procedure to avoid these limitations. Enron incorporated major projects into subsidiaries, the stock of which it designated as merchanitnvestments, and declared that it was in the investment company business, for which the AICPAsIn

39、vestment Company Guide applies. This Guide requires these companies to revalue financial assets held (presumably) for trading to fair values, even when these values are not determined from arm-slength market transactions. In such instances, the values may be determined by discounted expectedcash flo

40、w models, as are level 3 fair values.5 The models allowed Enrons managersto manipulate net income by making “erasonable”assumptions that would give them the gains they wanted to record. (Some notable examples are provided below.)Enron chief accounting officer, Rick Causey, used revaluations of these

41、 investments to meet the earnings goals announced by Skilling and Enron CEO and s Chairman of the Board, Kenneth Lay. “By the end of the decade”,McLean and Elkind (2003, p. 127) report, “some35 percent of Enronsassets were being given mark-to-market treatment.”When additional earnings were required,

42、 contracts were revisited and reinterpreted, if increases in their fair values could be recorded.However, recording of losses was delayed if any possibility existed that the investment might turn around.An example is Mariner Energy, a privately owned Houston oil-and-gas companythat did deepwater exp

43、loration in which Enron invested and which it bought out for needed to report increases in earnings until, by the second quarter 2001, it was on the books for $367.4 million. Analyses in the second and third quarters of 2001 by Enrons Risk Assessment and Controdlepartment (RAC) that valued the inves

44、tment at between $47 and $196 million did not result in accounting revaluations. After Enron s bankruptcy, MarineErnergy was written down to $110.5 million.$185 million in 1996. Enrons accountantsperiomdaicrkaellyd-up its investment as2.3 Braveheart partnership with BlockbusterIn the fourth quarter

45、2000 EBS announced a 20-year project (Braveheart) with Blockbuster to broadcast movies on demand to television viewers. However, Enron did not have the technology to deliver the movies and Blockbuster did not have the rights to the movies to be broadcast. Nevertheless, as of December 31, 2000, Enron

46、 assigned a fair value of $125 million to its Braveheart investment and a profit of $53 million from increasing the investment to its fair value, even though no sales had been made. Enron recorded additional revenue of $53 million from the venture in the first quarter of 2001, although Blockbuster d

47、id not record any income from the venture and dissolved the partnership in March 2001. In October 2001 Enron had to announce publicly that it reversed the $110.9 million in profit it had earlier claimed, which contributed to its loss of public trust and subsequent bankruptcy.How could Enron have so

48、massively misestimated the fair value of its Braveheart investment, and how could Andersen have allowed Enron to report these values and their increases as profits? Indeed, the Examiner in Bankruptcy (Batson, 2003a, pp. 30 31fi nds that An derse n prepared the appraisal of the project aSue. An derse

49、 n assumed the following: (1) the business would be established in 10 major metro areas within 12 months; (2) eight new areas would be added per year until 2010 and these would each grow at 1% a year; (3) digital subscriber lines (DSLs) would be used by 5% of the households, increasing to 32% by 201

50、0, and these would increase in speed sufficient to accept the broadcasts; and (4) Braveheart would garner 50% of this market. After determining (somehow) a net cash flow from each of these households and disco un ti ng by 31 4%, the project was assig ned a fair value. I suggest that this calculation

51、 illustrates an essential weakness of level 3 fair-value calculations that necessarily are not grounded on actual market transactions. How can one determine whether or not such assumptions baout a -tifmirset project are reasonable ?2.4. Energy management contractsIn December 2000, after Skilling bec

52、ame president of Enron, he created a separate business, Enron Energy Services (EES), with Lou Pai as its CEO.EES expected to sell power to retail customers, based on assumptions that the market would be deregulated and that the existing utilities could be undersold.Enron sold 7% of EES to institutio

53、nal investors for $130 million. Based on this sale (which might have qualified as a level 2 estimate), Enron valued the company at $1.9 billion, which allowed it to record a $61 million profit. However, EES sefforts were unsuccessful, in part because retail energy was generally not deregulated. Loss

54、es on the retail operations were not reported separately, but were combined with the wholesale operations.Pai then concentrated on selling contracts to companies and institutions to provide them with energy over long periods with guaranteed savings over their present costs. Customers often were give

55、n up-front cash payments in advance of the promised savings. These contracts were accounted for on a mark-to-fairvalue basis as of the date the contracts were signed. Sales personnel and managers (especially Pai) were paid bonuses based on those values. Not surprisingly, this compensation scheme gen

56、erated a lot of bad contracts. A particularly costly (to Enron) contract was signed in February 2001 with Eli Lilly to make improvements in its energy supply and use over 15 years. Disco unting these amounts by 8.25-8.50%, Enron valued the contract at $1.3 billion and recorded a $38 million gain. Wi

57、thin two years, this contract was considered to be worthless.In 2001, after Pai left EES and Enron, a long-time in-house Enron accountant, Wanda Curry, was asked to evaluate the EES contracts. Her group examined 13 (of 90) contracts that comprised 80% of the business. Each of them had been recorded

58、as profitable. Nevertheless, Curry found that the 13 contracts had a total negative value of at least $500 million. For example, a deal for which the company had booked $20 million in profits, actually was $70 million under water. Although, according to mark-to-fair-value accounting the decrease in

59、value documented by Curry should have been recorded, no such entry was made and Curry was reassigned.2.5. Derivatives tradingEnrons (derivatives) trading activities expanded beyond natural gas and power contracts to contracts in metals, paper, credit derivatives, and commodities. Much of this trading was done over an Internet system it developed, Enron On Line